BofA Earmarks $11.7 Billion to Cap Fannie Mae’s Claims

Bank of America said its deal with Fannie Mae will reduce fourth-quarter profit by about $2.7 billion, most of which is to add to provisions for repurchase demands. Photographer: Victor J. Blue/Bloomberg

Jan. 7 (Bloomberg) -- Bank of America Corp. agreed to an
$11.7 billion package designed to resolve most mortgage disputes
with U.S.-owned Fannie Mae after a deal announced two years ago
proved inadequate.

Bank of America will make a $3.6 billion cash payment,
spend $6.75 billion to buy back residential loans sold to Fannie
Mae, and pay $1.3 billion in fees for taking too long to assist
or foreclose on overdue borrowers, according to separate
statements. Even after these costs and an additional $2.5
billion for expenses that include litigation and a separate
regulatory settlement, the Charlotte, North Carolina-based
lender said the fourth quarter was “modestly” profitable.

It’s the latest effort by Chief Executive Officer Brian T.
Moynihan to cap the damage caused by his predecessor’s takeover
of Countrywide Financial Corp. and its defective subprime home
loans. Before today, the bank committed more than $40 billion
since 2007 to cover the costs of refunds and litigation tied to
faulty mortgages and foreclosures. Much of that sum went to the
government-sponsored entities of Fannie Mae and Freddie Mac.

“This does put the GSE stuff behind it,” said Paul
Miller, an FBR Capital Markets Corp. analyst who has a hold
rating on Bank of America shares. “We thought this would be
dragged out many years, or at least another two years.”

Earnings Impact

Bank of America said its deal with Fannie Mae will reduce
fourth-quarter profit by about $2.7 billion, mostly by adding to
reserves for refunds. Remaining demands for loan buybacks may
cost $4 billion more as of year-end 2012, the firm said. Before
today’s deal, the lender’s estimate of remaining costs was
$6 billion, indicating the settlement cost more than expected.

“Together, these agreements are a significant step in
resolving our remaining legacy mortgage issues,” Moynihan, 53,
said in the bank’s statement. Bank of America is the second-biggest U.S. bank by assets and was the largest U.S. home lender
before the 2008 credit crisis. The firm’s shares were little
changed at $12.04 as of 12:17 p.m. in New York.

Fannie Mae, Freddie Mac and other buyers of mortgages have
demanded compensation for loans created by Countrywide, which
Bank of America acquired in 2008, claiming the loans were based
on flawed data about the properties and borrowers that led to
record defaults.

Renewing Ties

The dispute with Fannie Mae peaked last year in January
when the Washington-based firm refused to renew its contract to
purchase new loans from Bank of America. Today’s settlement
clears the way for the two firms to potentially renew their
relationship, said a person with direct knowledge of the
process.

Negotiations between the companies gained momentum in
recent weeks when Bank of America increased its offer to Fannie,
said the person, who sought anonymity because talks were private.

The agreement covers $300 billion in outstanding principal
on loans sold to Fannie Mae between 2000 and 2008. In separate
deals, the lender also agreed, with permission from Fannie Mae
and other mortgage firms, to sell servicing rights on $306
billion in home loans to so-called specialty servicers.

The company sold mortgage servicing rights covering 2
million loans, saying that would significantly reduce the
numbers of delinquent borrowers it has to deal with. Nationstar
Mortgage Holdings Inc. said in a statement it will acquire
$215 billion in residential mortgage-servicing rights for about
$1.3 billion. The stock soared as much as 19 percent today.

Previous Payments

In January 2011, Bank of America said it was paying
$2.8 billion to Fannie Mae and Freddie Mac to settle disputes
over mortgages, and that the deals “largely addressed” the
liabilities. Its agreement with Freddie Mac proved to be more
comprehensive as claims from Fannie Mae climbed quarter after
quarter. Fannie Mae’s statement today outlined some exceptions
that may not be covered, with Bank of America saying the cost
isn’t expected to be material.

The disputes over mortgages and demands for refunds have
made investors skeptical about the true value of Bank of
America’s assets, with the stock selling at about 92 percent of
tangible book value, the firm’s theoretical liquidation price.

“They’re becoming less risky,” said Marty Mosby, an
analyst with Guggenheim Securities LLC. “As long as the bank is
trading below tangible book value, anything they can do to de-risk the balance sheet brings their stock price closer and
closer to achieving tangible book value.”